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Price far from right for gas drillers

The price of natural gas will have to rise about half again its current level before major producers in the Piceance Basin fire up their rigs again, industry officials and observers say.

It’s unlikely, though, that there will be much impetus behind the market going that high in the immediate future.

What price will spark new drilling programs?

“That’s the million-dollar question,” said R.T. Dukes, lead analyst of Rocky Mountain upstream research for Houston-based Wood McKenzie Research and Consulting.

Natural gas prices are set per million BTU, or British Thermal Units, and last week’s prices were about $3.25 per million BTUs.

“It’s got to go to $4.50 before you’ll see a major increase in drilling activity,” said Porter Bennett, president and CEO of Bentek Energy in Littleton.

Less optimistic was Don McClure, vice president of EnCana, one of the two most significant players in the Piceance Basin of northwest Colorado.

“You probably need $5 or $6” to spark the Piceance out of its doldrums, McClure said.

A price approaching $4 could get the attention of larger operators, and if the price approaches $5, that could start attracting smaller operators back to the market, Dukes said.

The Piceance Basin now is being worked by about 25 drill rigs, down from more than 100 late last year.

One factor that tends to encourage companies to continue drilling is that those that have remained busy are beginning to reap the rewards of having their most efficient rigs and most capable crews doing more work in less time,” Dukes said.

“It’s just experience, more than anything,” Dukes said of improvements in efficiency.

Those crews can move a rig from spud to spud in 10 days instead of 20, for instance, he said. A well is spudded when drilling begins.

“They’re drilling faster and completing cheaper” than before, he said.

There are bigger factors than efficiency, though, that help to hold down the price of Piceance Basin gas.

To begin with, Bennett noted, the price is likely to dip as pipeline companies complete scheduled maintenance, which has restricted transmission capacity and forced prices up temporarily. Once maintenance is complete, the lines will fill again and prices will fall slightly.

A more significant factor is competition, and fields such as the Haynesville shale of east Texas and Louisiana are producing more gas with less expense, Bennett said.

The break-even price for the Haynesville shale is about $2.94 per million BTUs, whereas it’s about $4 for the Piceance, Bennet said.

Other regions also are beginning to produce, as well, adding to the glut of gas now holding down prices.

The United States now has a bulging inventory of about 2.6 billion cubic feet of gas per day and is showing few signs of burning through it, Bennett said.

A slowly rebounding economy is a hopeful sign, McClure said, but there is no sign of immediate improvement for drilling in Colorado. That means it’s still difficult to gauge the effects of new drilling rules in the state, Dukes said.

Many firms still have permits issued under the old rules and can proceed under those rules, he said.

“We’ve not seen the effect yet because there is such a time lag,” he said.
Drilling companies, though, can’t discount the rules in Colorado or elsewhere, Bennett said.

If the region is to see a new burst of activity, Bennett said, “Regulatory and tax policies in the Rocky Mountain states must recognize the competitive disadvantage inherent in the Rockies’ position.”